chevron-down Created with Sketch Beta.

Litigation News

Litigation News | 2021

Arbitrator Error Is Not Grounds to Reverse Arbitration Award

Jared Lorenz

Summary

  • Court splits on whether error goes to arbitrability or scope of arbitral power.
  • The case illustrates the difficulty of overturning an arbitration award
  • It also serves as a reminder that parties should carefully review their arbitration agreements for clarity and consistency.
Arbitrator Error Is Not Grounds to Reverse Arbitration Award
JGI/Jamie Grill via Getty Images

Jump to:

A divided federal appellate court concluded that an arbitration panel did not exceed its powers when it purportedly erred in interpreting the underlying arbitration agreement, and therefore, there were no grounds for reversal of the arbitration award. ABA Litigation Section leaders say that the case illustrates the difficulty of overturning an arbitration award, and serves as a reminder that parties should carefully review their arbitration agreements for clarity and consistency.

Employer Fires Employee Who Threatens Arbitration

Gherardi v. Citigroup Global Markets Inc. involved a high-performing broker and investment advisor who allegedly engaged in abusive behavior toward colleagues. The company issued a “final warning” letter reprimanding the employee, which the employee challenged five months later. The company then fired the employee.       

The former employee initiated arbitration. He asserted claims for defamation, wrongful termination in violation of an anti-retaliation provision of the applicable arbitration policy, and wrongful termination in violation of “the common law of securities arbitration, which provides that registered persons are not at-will employees.” An employment agreement provided that he was an at-will employee. The employee handbook had an arbitration policy which also expressly prohibited retaliation against employees who filed arbitration claims.

An arbitration panel unanimously ruled in favor of the employee’s wrongful termination claim, awarding him nearly $4 million. It did not make specific findings or explain its reasoning.

When the former employee moved to confirm this award in the federal district court, the company opposed and moved to vacate it, arguing that the parties had not agreed to arbitrate the employees’s at-will status, and thus, the arbitrators lacked power to issue an awards based on wrongful termination. The U.S. District Court for the Southern District of Florida granted the company’s motion to vacate the award, reasoning that the arbitrators exceeded their powers.

Did the Arbitrators Violate the Arbitration Agreement?

The U.S. Court of Appeals for the Eleventh Circuit reversed, explaining that “under the FAA [Federal Arbitration Act], federal courts have limited authority to vacate or modify an arbitration award.” The court explained that vacatur is permitted “only in very unusual circumstances,” only one of which was at issue: whether “the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.”

The appellate court concluded that the arbitrators did not exceed the power delegated to them. In so holding, the majority noted that the parties had agreed to (1) arbitrate “all employment-related disputes” and (2) that “any dispute as to the arbitrability of a particular claim . . . shall be resolved in arbitration.” Because the employee’s wrongful termination claim was “employment-related”, the Tenth Circuit determined that that issue had been delegated to the arbitrators, and that it therefore lacked the power to review the merits of the arbitrators’ decision. The court also rejected the company’s argument that the parties had not agreed to arbitrate the issue of the employee’s at-will employment status, characterizing it as a merits issue that had been delegated to the arbitrator.

By contrast, the dissent would have also looked at whether any other contractual provisions limited the arbirators’ power—that is, “whether the arbitrators violated the agreement to arbitrate.” Specifically, the dissent pointed to a provision stating that the arbitration agreement does not “constitute, nor should it be construed to constitute, a waiver by Citi of its rights under the ‘employment-at-will’ doctrine nor does it afford an employee or former employee any rights or remedies not otherwise available under applicable law.” The dissent interpreted that term to mean that the arbitrators could not modify the employee’s status as an at-will employee, and would have held that more specific provision controlled. Since at-will employees cannot recover compensatory damages for wrongful termination, the dissent would have affirmed the district court ruling in favor of the employer.

Case Reinforces Limited Nature of Challenges to Arbitrations

Parties seeking a second shot at the merits via the courts may wish to think twice. Based on recent jurisprudence in line with this case, “the realistic options for challenging a domestic arbitration award are the grounds enumerated in the FAA,” notes Betsy A. Hellmann, New York, NY, cochair of the Litigation Section’s Alternative Dispute Resolution Committee. “The debate about whether there should be others played out for a very long time in the courts—most notably in the judicially-created doctrine ‘manifest disregard of the law,’” she continues. “After the Supreme Court’s decision in Hall Street Associates, LLC v. Mattel, Inc., courts—including the Eleventh Circuit, as the court here explains—have held that such judicially-created doctrines violate the FAA,” she offers.

“The court recognizes that a central benefit of arbitration is finality of the decision. They are deferring to the arbitrators’ judgment and do not want to encourage litigation over arbitration awards,” states Mitchell L. Marinello, Chicago, IL, cochair of the Section’s Alternative Dispute Resolution Committee. “The parties can always make arbitration lengthier and more expensive than it needs to be and fighting about confirmation of the award is certainly one way to do that. However, sometimes the smartest thing to do is to leverage your victory to get a better settlement instead of trying to get the maximum benefit out of it, although this is not always possible,” explains Marinello.

Although some may view the limited nature of judicial review of arbitration awards as a risk, “many actors in commercial disputes place great value on the ability to get a dispute resolved quickly so that the parties can move on,” and therefore view that risk as acceptable, explains Hellman. “It is worth noting that speed, efficiency and cost-effectiveness are not the only benefits of arbitration; many litigants also value the fact that they can choose arbitrators with expertise relevant to the dispute and the fact that they can choose to keep the dispute confidential,” she adds.

Resources

    Author